A Quiz on First-Time VC Funds

(Plus 5 Tips for new GPs)

6/15/2016 1

Dan Abelon

@dabelon

Kauffman Fellows Module: June 15, 2016

1. The Quiz: How much do you know about First-Time Funds?

2. Tips for First time funds

6/15/2016 Dan Abelon @dabelon 2

Question #1:

Why do First-time VC Funds Matter?

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Question #1:

Why do First-time VC Funds Matter?

1. No industry including VC can thrive without innovative new entrants

2. Many regions lack high-quality established funds

3. New funds exhibit above average performance*

4. ALL great VC firms started with Fund I

6/15/2016 Dan Abelon @dabelon 4

*Source: Harris, Jenkinson, Kaplan, Stucke. 2014. Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds.

Question #2:

According to GPs, what is most challenging about starting a new fund?

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Question #2: According to GPs, what is most challenging

about starting a new fund?

1. Generating LP intros

2. Designing persuasive fundraising material

3. Team’s professional development

4. Defining legal structure

5. Choosing technology to support your fund

6/15/2016 Dan Abelon @dabelon 6 Source: My survey of 40 emerging GPs. 2015.

Question #3:

How many first-time funds raise capital per year?

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Question #3: How many first time funds raise per year?

0

10

20

30

40

50

2012 2013 2014 2015 2016 (Q1/Q2)

Number of New VCs Raising Capital

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~40 new funds per year. 200+ new funds raised from

400+ LPs the last five years

Source: Pitchbook (last five years globally)

Question #4:

Who funds first-time funds the most?

Corporations?

Other VCs?

HNW individuals?

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Corporates and HNW lead, but many types of entities fund

first time funds

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0

10

20

30

40

50

60

70

Question #4: Who funds first-time funds the most?

Source: Pitchbook, 2012 - ’16, globally.

Number of First-Time VCs Funded by LP Type

Question #5:

How many LPs specialize in first-time funds? (10+ investments the last 5 yrs)

<10 LPs?

25 LPs?

50+ LPs?

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Question #5: How many LPs specialize in first-time funds?

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0

50

100

150

200

250

300

350

400

1 2 3 - 10 10+

Number of first time funds backed per LP

1

Only one institutional LP backed more than 10 first-

time VC funds the last 5 years

Source: Pitchbook, 2012 - ’16, globally.

Question #6:

Which LPs back the most first-time funds?

University of Texas Mgt Company?

European Investment Fund?

IP (Danish Pension Fund)?

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EIF is the top investor globally in first-time VC funds. Three top LPs are VCs themselves.

LP Number of Commitments

European Investment Fund (EIF) 16

IFC 7

BPI France 5

Industriens Pensionsforsikring (corp pension)

5

University of Texas Investment Mgt Co 4

Kleiner Perkins 4

Accel 4

Sequoia 4

6/15/2016 Dan Abelon @dabelon 14 Source: Pitchbook, 2012 - ’16, globally.

Question #6:

Which LPs back the most first-time funds?

Question #7:

What is the median first-fund size?

$10M?

$25M?

$40M?

6/15/2016 Dan Abelon @dabelon 15 Source: Pitchbook

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0

10

20

30

40

50

60

70

<10M 11-30M 30-100MM 100-250M 250M+

Question #7:

What is the median first-fund size?

Fund sizes vary. Median first-fund size is surprisingly

high - $40M

Source: Pitchbook, 2012 - ’16, globally.

Question #8:

How long do GPs think it will take to raise a first-time fund?

1 year?

2 years?

4 years?

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Question #8: How long does it take to raise a first-time fund?

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12

22

43

0

5

10

15

20

25

30

35

40

45

50

Min Median Max

Median GP expectation is 22 months, although some GPs expect fundraising to take up to 43 months

Source: My survey of 40 emerging GPs. 2015.

Question #9: What do these VCs have in common?

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Question #9: What do these VCs have in common?

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All are examples of VCs who have funded first-time funds. (Thanks for paying it forward)

Question #10: What are ways to support GPs who are

starting new funds?

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• More information/training for emerging VCs

• Increased opportunities to form community among emerging VCs

• More data on which LPs are open to investing in emerging VCs

• Increased research on predicting emerging fund success*

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Question #10: What are ways to support GPs who are

starting new funds?

*See Kaji, Arnold. 2016. Another Measure of Seed Fund Performance.

5 Tips for First-Time Funds

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1. Understand LPs’ goals

Potential LP Goals

• Access to long term partners to grow exposure to VC

• Strategic reasons (e.g. direct deal sourcing)

• Improved economics vs. existing funds*

• Supporting a friend/family member

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*Source: Harris, Jenkinson, Kaplan, Stucke. 2014. Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds.

2. Think hard about how to stand out. Most emerging GPs THINK they are differentiated.

Why is your fund attractive to LPs? (from my survey of 40 GPs)

1. Fund has an innovative strategy (83%)

2. Proprietary network (63%)

3. Entrepreneurial background (53%)

4. Strong personal brand (30%)

5. Great track record (23%)

6/15/2016 Dan Abelon @dabelon 25 Source: My survey of 40 emerging GPs. 2015.

3. Build a track record creatively

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Bring an investor with a strong

track record onto your team

Find a HNW friend.

Invest their $$ deal by deal.

Leverage existing platforms

to syndicate deals

4. Reflect upfront on how you might entice potential LPs

Would you grant special terms to attract LPs? (from my survey of 40 GPs)

1. Right to invest in future funds (90%)

2. Coinvestment rights (77%)

3. Information rights (65%)

4. Access to your pro rata (52%)

5. GP interest in current fund (35%)

6. Partial ownership of your firm (23%)

7. Fee discount (16%)

6/15/2016 Dan Abelon @dabelon 27 Source: My survey of 40 emerging GPs. 2015.

5. Be proactive in helping LPs evaluate the soft stuff

• How long have the partners know each other?

• How do you make decisions as a group?

• Have you been through tough times together?

• How do you manage conflict?

• To what extent are you really being yourself in meetings with LPs?

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Thank you and good luck!

Twitter: @dabelon

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